Lec_EVA_CH16_Spring2010 - Financial Markets and...

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Evaluation of Managerial Performance – MVA and EVA Financial Markets and Institutions
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Concepts of MVA & EVA Market Value Added (MVA) measures the effects of managerial actions since the inception of a company. Economic Value Added (EVA) focuses on managerial effectiveness in a given year.
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Income Statement 2007 2008 Sales 3,432,000  5,834,400  COGS 2,864,000  4,980,000  Other expenses 340,000  720,000  Deprec. 18,900   116,960      Tot. op. costs 3,222,900   5,816,960   EBIT 209,100  17,440  Int. expense 62,500   176,000   EBT 146,600  (158,560) Taxes (40%) 58,640   (63,424) Net income 87,960   (95,136)
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Balance Sheet Assets 2007 2008 Cash 9,000 7,282 S-T invest. 48,600 20,000 AR 351,200 632,160 Inventories 715,200 1,287,360 Total CA 1,124,000 1,946,802 Gross FA 491,000 1,202,950 Less: Depr. 146,200 263,160 Net FA 344,800 939,790 Total assets 1,468,800 2,886,592 Liabilities & Equity 2007 2008 Accts. payable 145,600 324,000 Notes payable 200,000 720,000 Accruals 136,000 284,960 Total CL 481,600 1,328,960 Long-term debt 323,432 1,000,000 Common stock 460,000 460,000 Ret. earnings 203,768 97,632 Total equity 663,768 557,632 Total L&E 1,468,800 2,886,592
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Market Value Added (MVA) MVA = Market Value of the Firm - Book Value of the Firm Market Value = (# shares of stock)(price per share) + Value of debt Book Value = Book value of total common equity + Value of debt (More…)
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MVA Calculation If the market value of debt is close to the book value of debt, then MVA is: MVA = Market Value of Equity – Book Value of Equity = (# shares of stock)(price per share) Book value of total common equity
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MVA (Assume market value of debt = book value of debt) Market Value of Equity 2008: Book Value of Equity 2008: MVA 08 =
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MVA (Assume market value of debt = book value of debt) Market Value of Equity 2008: 317.27 * 307.65 = 97,608 Book Value of Equity 2008: 28,239 MVA 08 = 97,608 – 28,239 = 69,369 M
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Economic Value Added (EVA) EVA is an estimate of a business's true economic profit for the year. EVA = NOPAT – After-tax dollar cost of capital = EBIT (1 – Tax rate) – WACC(Operating capital) WACC is weighted average cost of capital EVA = (Operating capital)(ROIC – WACC)
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EVA Calculation EVA = NOPAT – (WACC)(Operating capital) NOPAT = EBIT (1 – Tax rate) Operating capital = NOWC+Net fixed assets Net Operating Working Capital (NOWC) = Operating CA – Operating CL = (cash + accounts receivable + inventories) – (accounts payable + accruals)
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Net Operating Profit after Taxes (NOPAT) NOPAT = EBIT(1 - Tax rate) NOPAT 08 =
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Net Operating Working Capital (NOWC) NOWC 08 = = - Operating CA Operating CL NOWC
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Operating Capital Operating capital= NOWC + Net fixed assets Operating capital 08 =
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Economic Value Added EVA = NOPAT- (WACC)(Operating capital) EVA 08 =
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Economic Value Added EVA = NOPAT- (WACC)(Operating capital) EVA 08 = 4,331.96 - 0.08*14,517 = 4,331.96 – 1,161.36 = 3,170.6
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Return on Invested Capital (ROIC) ROIC = NOPAT / Operating capital ROIC 08 =
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Did the Growth Add Value?
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